The complexities of the US budgetary process explained


The complexities of the US budgetary process explained

A. Premchand

The basic objectives of government budgeting, as they have evolved, are (1) to relate expenditure decisions to specified policy objectives and to existing and future resources; (2) to relate all major decisions to the state of the national economy; (3) to ensure efficiency and effectiveness in the implementation of government programs; and (4) to facilitate legislative control over the various phases of the budgetary process. The administrative process intended to convert these objectives into day-to-day operations operates within a political context. In recent years considerable publicity has been given to the budgetary situation of the United States, in particular the efforts to reduce--and eliminate--the deficit. However, the unique and complex US budgetary process, and the difficulties of effecting major changes, are often not clearly understood. This article seeks to provide an overview of the budgetary framework and process in the United States.

A little history

During the early years of the working of the Constitution, particularly after 1791, the US Congress showed the same attitude as the legislature in Britain and made efforts to gain control over the Executive branch of government through the device of specific appropriations of funds for purposes approved by Congress. This period witnessed the ascendency of the Congress over the Executive in the control of the budget. Within the Executive, the Treasury Department was assigned the task of transmitting the budget estimates to Congress, and the President had no responsibility for the budget. Congress, for its part, was more anxious to gain control over the Executive and had little interest in securing economy in expenditure. This situation continued practically up to 1912 when the whole issue was comprehensively reviewed by the Taft Commission which recommended placing responsibility for the budget in the President’s office. But the implementation of this recommendation had to await the end of the First World War. The war period itself witnessed a slight relaxation in the Congressional control in that greater flexibility was given to the Executive to meet war exigencies. In 1921, with the passage of the Budget and Accounting Act, a Bureau of the Budget was established in the Executive, and was entrusted the task of preparing an annual budget. Passage of the 1921 Act was facilitated by the belief that centralization of the primary responsibility in the Executive would lead to expenditure and tax reductions from the high levels experienced during the war.

The implementation of the new procedures ushered in as part of the 1921 Act involved the establishment of several Congressional committees to approve, modify, or disapprove the President’s proposals; to authorize and appropriate funds; to oversee departmental activities; and to raise taxes or incur debt. Each committee developed, in due course, its own domain and, as a consequence, sectional interests emerged as major political phenomena. The President had to rely on his powers of persuasion or ability to reach political agreement to ensure availability of funds. The procedures for budget approval also increased in complexity and the achievement of the goals of economy and efficiency continued to be elusive. Indeed, the whole process became so entropic that the late Professor Arthur Smithies of Harvard, reviewing the situation in 1955, thought that it was miraculous that the process worked as well as it did, and attributed it to the ‘triumph of the wisdom of individuals over defective organization.’

Recent developments

The problems arising from the excessive fragmentation of jurisdiction among the Congressional committees led to friction among them. Often policy purposes were lost in attention to minutiae, and isolated actions by the committees did not add up to coherent strategies. Appropriation bills were also not completed in time, and more significantly by the early 1970s, there was a considerable increase in ‘backdoor’ spending or resort to methods to circumvent the appropriation process through the enactment of laws mandating federal payments, and granting of authority to enter into obligations, prior to appropriations. Further, in the early 1970s, there were Presidential impoundments of voted funds with a view to containing budget deficits. As the legislature became more vulnerable to budgetary stress, the systems and procedures of budget making in the Congress came to be examined more closely. The result of this scrutiny was the enactment of the Congressional Budget and Impoundment Control Act of 1974. As a part of the implementation of this Act, new institutions were established and improved procedures formulated. These included the creation of budget committees over and above the existing authorizing appropriation and revenue committees, a Congressional Budget Office (CBO), a timetable for the budget legislation, and related controls. The Act specified a process through which the budget must go and, more important, made budget making an exercise of majority rule by forcing the Congress to reach an agreement on the budget each year. Some of the procedures introduced were further refined under the Balanced Budget and Emergency Deficit Control Act of 1985 (better known as ‘Gramm-Rudman-Hollings’ Act, after the three senators who sponsored the legislation). The 1985 Act codified the ad hoc changes made since 1974 and superimposed new procedures. The Act brought all federal spending activities into the framework of congressional overview and, with a view to containing budgetary deficits, specified the limits of such deficits and enforced them down to the level of committee allocations; it also mandated the President’s compliance with the specified deficits.

Selected concepts and terms used in the US budgetary process

Appropriation: Authority that permits government agencies to incur obligations and to make payments for purposes specified.

Authorization: A measure enacted by the Congress providing the legal base for the operation of an agency or a program; it is a prerequisite for appropriations.

Balanced Budget and Emergency Deficit Control Act of 1985: Also known as Gramm-Rudman-Hollings’ Act, it establishes maximum deficit amounts for fiscal years 1986 to 1991.

Base-Line Projections: Projections of future revenues and expenditures under current law or policy.

Budget Authority: Authority provided by law to enter into obligations leading to outlays. This includes appropriations, authority to borrow, and authority to enter into contracts in advance of an appropriation.

Budget Resolution: A resolution passed by both Houses of the Congress setting out aggregate outlays, revenues, loans, loan guarantees, etc. This does not require the President’s signature. The spending and credit aggregates are distributed among functional categories.

Credit Budget: This covers proposed direct loan obligations and guaranteed loan commitments.

Entitlement: This refers to programs operating under law to make payments for which the budget authority is not provided in advance by appropriation acts.

Functional: This refers to the 21 categories into which spending Category: and credit are divided in a budget resolution for analytical purposes.

Margin: Difference between receipts and outlays: margin is negative when there is a deficit, positive in the context of a surplus, and zero when there is a balance.

Off-Budget: This refers to programs and entities that are excluded from the budget (e.g., pension funds).

Outlays: Payments made normally in the form of checks issued or cash disbursed.

Reconciliation: This refers to a provision in the concurrent resolution on the budget that calls on congressional committees to recommend legislative changes that increase receipts or reduce outlays to be in line with the levels set in the budget resolution.

Budgetary Process

The current process is thus one which is largely shaped by the legislative provisions described above. The process itself can best be summarized in terms of those who have a role to play, the sequence of events, the implications of the underlying concepts, and related aspects. These are illustrated in the accompanying charts and boxes. It should be noted that changes in the operational procedures have become an annual occurrence and, to that extent, the illustrations reflect the essential framework of the budgetary activities rather than their actual current operation. Also, for the sake of discussion, the description of the process is compressed and simplified. The reality is rather more complex, far more legalistic in orientation, and the terminology often ‘obscure and confusing,’ to quote President Ronald Reagan.

Budgeting is both a sequential and an iterative process and depends, for its success, on the guidance provided by the central agencies and on compliance by the spending agencies. In the United States the fiscal year runs from October 1 of one year to September 30 of the next. The President’s budget formulation starts with a review of policy options in the light of an assessment of trends in the economy. The result is the provision of guidelines to federal agencies in the Spring on their budgets to be prepared for the fiscal year that will start some 17 months later. Government agencies submit their budget request to the Office of Management and Budget (OMB) by early September. The federal agencies are expected to follow a three-track approach to budgeting-the implementation of the current fiscal year’s budget, the procurement of Congressional approval of their budgets for the next fiscal year, and preparation of the budget for the year after that. To illustrate, in April 1987 federal departments would be working on the execution of the 1986-87 budget, processing the approval of the budget for 1987-88, and compiling initial estimates for the 1988-89 budget (i.e., the budget that will be transmitted by the President to the Congress in January 1988).

The estimates so furnished by the agencies are reviewed by the OMB and, after necessary revisions, are consolidated into the President’s budget and submitted to the Congress in January of the following year. Two features of this process merit particular attention. First, the budget is formulated in the context of a multiyear budget planning system, and the estimates cover the four years following the budget year. Second, the estimates also show the budget authority and outlays needed to maintain government services and activity without any change in policy and thus reveal to the Congressional committees the magnitude of discretionary spending.

The budget is then considered by the Congress and eventually modified or approved in a different form. A first step in government spending is authorization of funds (see box). The Congress, however, votes on the budget authority and not on the level of outlays. (Chart 2 shows the relationship between budgetary authority and outlay.) In many cases, authorizations may be available for a specified period or without any limitations. Appropriations are the main form of budget authority provided by the Congress and it is these that permit the agencies to incur obligations.

Chart 1
Chart 1

The budgetary process

Citation: Finance & Development 0024, 003; 10.5089/9781616353704.022.A011

Chart 2
Chart 2

Budget authority and outlay—an illustration

Citation: Finance & Development 0024, 003; 10.5089/9781616353704.022.A011

As a first step in the Congressional process, the President’s budget is subjected to hearings by the two budget committees in the House of Representatives and in the Senate. The committees also receive the analysis of the CBO by February 15. This analysis pays particular attention to the economic assumptions of the budget and to the baseline projections. The next step is the receipt of the recommendations of all standing committees (see Chart 1) of both the House and the Senate concerning the new budget authority and outlays for activities under their jurisdiction. This is followed by the passage of a budget resolution by April 15. The resolution sets out the budget authority and outlays in terms of the major aggregates and provides guidance to the Congress in its subsequent revenue and spending decisions. Budget authority and outlays indicated in the resolution are considered as ceilings and the estimated revenues as a binding floor.

The appropriation process is initiated in the light of the budget resolution. Traditionally, appropriation bills originate in the House of Representatives and the appropriation committees of the two Houses are structured into subcommittees on the lines of federal government departments to oversee their funding needs. After these needs are approved by the House, they are sent to the Senate which undertakes a similar review. In cases of disagreement, a conference committee comprising members of both chambers is organized to resolve differences. The report of the conference committee is then approved, first in the House and then in the Senate, and thereafter submitted to the President for his approval or veto.

A major step in the Congressional action is the reconciliation process. The purpose of this is to require all Congressional committees to implement the decisions embodied in the budget resolution in regard to tax and spending matters. This process may involve more than one committee. Action on reconciliation and appropriation is to be completed by end-June of each year. If, however, these various actions are not completed by the beginning of the fiscal year (i.e., by October 1), Congress enacts a ‘continuing resolution’ under which funds are provided to defray government expenses.

A more recent addition to the process is the requirement under the Gramm-Rudman-Hollings Act to adhere to a designated deficit target or the total margin which covers both budget and off-budget items (see box). If, however, the target is unlikely to be met, the Act provides that budgetary resources may be sequestered by reducing outlays. The need for this reduction is determined in the light of a joint assessment by OMB and CBO, and Congressional consideration thereof.

The budget, after its approval by the President, becomes the basis for the release of budget authority and resources through an apportionment system, administered by the OMB, in terms of defined periods and categories of activities. If more resources are needed in the course of the year, supplemental requests are considered by the Congress. Within the Executive branch, certain deferrals (i.e., temporary withholding of budgetary authority) or rescissions may be undertaken in certain contingencies. These must be reported to the Congress which can, however, overturn them and restore funds to the agencies.

The system at work

The objectives of the 1974 and 1985 Acts were to streamline and bring greater coherence, discipline, and economic context to budgetary procedures. This is no mean task given the various political pressures at work and the lengthy budgetary calendar. This calendar has many steps. At each step there is considerable uncertainty about the eventual outcome. The determination of fiscal aggregates, including the magnitude of deficits, is not easy and the political decisionmakers have the difficult task of matching thought and action while seeking to ensure that what is decided is not only feasible but offers a coherent policy for the economy.

US budgetary process: sequence of events

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Note: the timing indicated above can be varied from one year to another.

Legislative decisionmaking on financial matters needs good policy analysis. While such analysis is available from the CBO and the staff of the Congressional committees, it is also true that in the final analysis the budget inevitably reflects the political choices of the majority. These views are shaped by a combination of political philosophy, social priorities, pragmatism, and what is perceived to be the need of the hour. Members of the legislature are often impelled by local or regional considerations which lead to higher expenditures; these have then to be balanced by broader, national, considerations.

Both the 1974 and 1985 Acts testify to the desire of Congress to improve its operational procedures. In addition, the 1974 Act had a major role in arranging the convergence of revenue and expenditure budgets, in developing the credit budget, and in expanding the base of fiscal information. Further, the reconciliation procedures enabled the legislature to assert the role of the budget committees and to enact sizable cutbacks. On the other hand, there were major delays in passing legislation and frequent resorts to continuing resolutions which, in a way, ran counter to the spirit of the 1974 Act. To some extent, however, these developments were exacerbated by the absence of a political consensus in an environment of ‘cutback management.’

Although some policymakers feel that institutional improvements are only marginally relevant to existing fiscal dilemmas, others are of the view that there is considerable room for strengthening the budget process. An important issue, however, is not so much the identification of the problem areas as much as the bewildering array of options.

The proposals that have been made for improvement cover both the Congressional and Executive operations, as well as enactment of new laws. As regards the former, suggestions include the introduction of a biennial budget which, while enabling a longer timetable, would be in conformity with the tenure of the members of the House of Representatives (who are elected for two-year terms), and combining the Appropriation and Budget Committees of the Houses. On the Executive side, it has been argued that in addition to the available options of deferral and rescissions, the President should also be endowed with a ‘line-item’ veto of Appropriation bills, that is, with the power to rescind parts of appropriations.

It has also been suggested that an amendment to the US Constitution mandating a balanced budget would be more effective. But budget practitioners point out that there are too many variables that would defy a precise definition of a balanced budget and that, in any event, the amendment could easily be circumvented both in spirit and word. Moreover, the Gramm-Rudman-Hollings Act is to be seen as an effort at mandating the size of permissible fiscal deficits.

The very fact that these avenues are being explored is an indication of the awareness of the problems and the perceived need for further reform.

Finance & Development, September 1987
Author: International Monetary Fund. External Relations Dept.